Landmarks in the Emergence of Corporate

Landmarks in the Emergence of
Corporate Governance
Chapter 3
Development is US
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Water gate Scandal
Foreign & Corrupt Practices Act, 1977
Securities & Exchange Commission 1979
Treadway Commission 1987
Developments in UK
• BCCI Scandal
• Failure of Baring Bank
• COSO
Corporate Governance Committees
– Cadbury report
– Paul Ruthman Committee
– Greenbury Committee 1995
– Hampel Committee 1995
– Combined Code, 1998
– Turnbull Committee, 1999
Cadbury Committee on Corporate
Governance (1992)
• The stated objective of this report was
– “to help raise the standards of corporate governance
and the level of confidence in financial reporting and
auditing by setting out clearly what it sees as the
respective responsibilities of those involved and what it
believes in expected of them”• Code of best practices in December, 1992
• Cadbury report of best practices has 19 recommendations
• Recommendations are guidelines
Cadbury Committee on Corporate
Governance (1992)
• Guidelines are related to the:
– BOD
– NED
– ED
– Reporting and control
The Paul Ruthman Committee
• It is constituted to deal with the controversial
parts of Cadbury report
The Greenbury Committee, 1995
• Set up in Jan, 1995 to
identify good practices by
the CBI, Confederation of
British Industry
– Aimed to provide answers
about accountability
– Allocation of responsibility
– Produced Greenbury Code of
Best Practice which was
divided into four sections:
Remuneration
Committee
Service
contracts and
compensation
Greenbury
Code of
Best
Practice
Remuneration
Policy
Disclosures
The Hampel Committee, 1995
• Further development of Cadbury report
• Auditors should report privately to directors
• Directors should maintain and review all
controls
• Companies should add internal audit function
The Combined Code 1998
• Derived from Hampel committee’s final
report, Cadbury report and Greenbury report
• Sound systems of internal control
• Lesson from the past; effective risk
management
The Turnbull Committee
• Set up by the Institute of Chartered
Accountants in England and Wales (ICAEW) in
1999 to provide guidance to assist companies
in implementing the requirements
• Corporate governance is not a static concept,
infact it is dynamic and thus needs to be
altered with the changes that occur in the
business environment.
World Bank on Corporate Governance
• One of the earliest International organizations to
study the issue of corporate governance
• Principles such as transparency, accountability,
fairness and responsibility are universal in their
application
• Governance initiatives when driven from the
bottom up rather than top down
• The aim is to align as nearly as possible the
interests of individuals, corporations and society
• Openness is the basis of public confidence in the
corporate system
OECD Principles
• Has strongly promoted good corporate
governance by the implications of following
corporate governance guidelines:
– 1. Rights of shareholders
– 2. Equitable treatment of shareholders
– 3. Role of stakeholders in corporate governance
– 4. Disclosure and transparency
– 5. Responsibilities of the board
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McKinsey Survey on Corporate
Governance
• According to McKinsey survey, Good corporate
governance increases market valuation by
following ways:
– Increasing financial performance
– Transparency of dealing, thereby reducing
the risk that boards will serve their own
self-interest
– Increasing investor confidence
McKinsey Survey on Corporate
Governance
–McKinsey rated the performance on corporate
governance of each company based on the following
parameters:
•Accountability
–Transparent ownership, Board size, Board accountability,
Ownership neutrality
•Disclosure and Transparency of the Board
–Timely and accurate disclosure, Independent Directors
•Shareholder equality
–One share, One vote
Sarbanes-Oxley Act, 2002
• This act calls for protection to those who have the
courage to bring frauds to the attention of those
who have to handle frauds
• It ensures that such things are not left to the
individuals who may or may not choose to reveal
them
• SOX Act is a sincere attempt to address all the
issues associated with corporate failures to
achieve quality governance and to restore
investor’s confidence
Sarbanes-Oxley Act, 2002
• SOX Act has established following improved provisions:
– Establishment of Public company Accounting Oversight
Board
– Audit committee
• Following critical accounting policies should be directly reported to
audit committee:
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Conflict on interest
Audit patron rotation
Improper influence on conduct of audits
Prohibition of non-audit services
CEOs and CFOs are required to affirm financials
Loans to directors
Attorneys
Securities analysts
Penalties